October 2014

October 15, 2014

I gave a talk yesterday on New Growth Strategies at the World Bank, which was more or less an elaboration of this short piece. I argued that industrialization had pretty much run out of steam as a growth strategy, that services would need to be the focus going forward, and that this required in turn a different policy mindset about how to increase productivity. In particular, I argued that policies focusing on generating a sequence of sectoral “winners,” which worked so well in manufacturing (garments to car seats to cars to electronics), would have much smaller payoff in services, in view of the non-tradability of most service segments.

I suggested further that, even under the best of circumstances, a services-oriented strategy would yield lower growth than what earlier episodes of rapid industrialization had produced. Here is the PowerPoint presentation with some background charts and analytical detail.

There was a fair amount of pushback from the people I talked to afterwards (as well as in reactions I got to my Project Syndicate piece). One line of argument I hear is that the border between manufacturing and services has become blurred. This is certainly true. There is evidence that a growing share of what shows up as manufacturing value added in national statistics is in fact services – either research and design or post-production services.

But I am not sure why this matters that much. If anything, the rising services content of manufacturing makes premature deindustrialization even more striking. It does remind us, however, that the relevant distinction may not be between industry and services, but between (i) modern and traditional; and (ii) tradable and non-tradable. What is worrying in developing countries is that even though modern tradables are doing well in terms of productivity, they are not expanding nearly as rapidly as is needed to generate rapid economy-wide growth.

Another line is that many services are becoming in fact tradable. This too is true, though most tradable services (think of finance or ICT) are very skill intensive and generate little demand for unskilled labor.

A third is that there is still significant room for low-income countries in Africa and South Asia to diversify into manufactures. In principle yes, but why are we not seeing this happening? Why, instead, are these countries de-industrializing?